Cooper Decade-High Bid Price Turns Hubbell into Target: Real M&A

May 24 (Bloomberg) -- The takeover of Cooper Industries Plc
at the highest price tag for an electrical-equipment deal in
more than a decade is turning Hubbell Inc. and Acuity Brands
Inc. into the next potential targets.

Eaton Corp. agreed this week to buy Cooper, the maker of
products from LED lighting to industrial circuit breakers, for
$12.8 billion including net debt in the biggest electrical-components, electronics or diversified-manufacturing acquisition
since 1999, according to data compiled by Bloomberg. With ABB
Ltd. also buying Thomas & Betts Corp. this year, the wave of
consolidation may sweep up Hubbell, another large independent
U.S. electrical company, said Macquarie Group Ltd., or Acuity,
the biggest U.S. lighting-fixture maker, said JMP Securities.

Hubbell, with a market value of $4.7 billion, and Acuity at
$2.3 billion are both projected by analysts to post record
profit next year as non-residential U.S. construction increases.
Further improvement in the commercial building market next year
will help drive takeovers of electrical-equipment companies,
said Macquarie. Siemens AG, Schneider Electric SA and General
Electric Co. will be among the potential buyers, according to
Longbow Research.

“One of the obvious targets out of the U.S. is gone, so
there’s scarcity value in what’s remaining,” Shawn Severson, a
San Francisco-based analyst at JMP, said in a telephone
interview. “In lighting, now you only have two choices: Acuity
and Hubbell. And in electrical products, you’ve got one choice
really and that’s Hubbell.”

Takeover Wave

James Farrell, director of investor relations for Shelton,
Connecticut-based Hubbell, didn’t respond to phone and e-mail
messages seeking comment. Dan Smith, a senior vice president and
treasurer for Acuity, declined to comment on whether the
Atlanta-based company has been approached by any buyers.

A spokesman for Schneider, which is based in Rueil-Malmaison, France, near Paris, and Andrew Williams, a spokesman
for Fairfield, Connecticut-based GE, declined to comment on
whether the companies are interested in a deal in the
electrical-components space or are considering a takeover of
Hubbell or Acuity. Wolfram Trost, a spokesman for Munich-based
Siemens, also had no comment on possible takeover targets.

On May 21, Eaton said it will acquire Cooper to expand its
power-management business, tap into a U.S. construction recovery
and diversify further away from auto parts. Zurich-based ABB,
the world’s largest maker of power-distribution equipment,
agreed to buy Memphis, Tennessee-based Thomas & Betts in January
for $3.9 billion to build its presence in the U.S. low-voltage
market.

Rebound in Construction

The Architecture Billings Index, an indicator of American
construction activity, had shown increased billings for non-residential construction in five straight months before
declining in April.

“Early leading indicators are pointing to flat to modest
growth six months out” for non-residential construction, Mike
Wood, a New York-based analyst with Macquarie, said in a phone
interview. “The fact that we’re at or near trough levels
currently, particularly in the construction market, would speak
to accelerating consolidation as we get further along.”

Acuity, Hubbell and Cooper are among the four largest
commercial lighting companies, which together command about 70
percent of a market that will grow as non-residential
construction rebounds, said Wood. The fourth is a unit of
Koninklijke Philips Electronics NV.

Lighting Market

Revenue for the North American commercial-lighting market
is forecast to rise more than 50 percent to $17.5 billion in
2015 from $11.5 billion last year, according to an Acuity slide
presentation this month.

Acuity, which says it has the largest share of the
commercial indoor, outdoor and emergency lighting market,
reported fiscal 2011 sales of $1.8 billion, the highest in three
years. Analysts estimate net income will climb 45 percent from
last year to a record $153 million in fiscal 2013.

“Acuity is an attractive asset because it’s a dominant
player in the North American lighting business,” said JMP’s
Severson. “People understand now that the value is in the
fixture and in the systems, not in the bulbs.”

Still, Acuity’s singular focus on lighting systems may
deter potential buyers, said Joel Levington, a managing director
of corporate credit at Brookfield Investment Management Inc. in
New York. The range of Cooper’s products, from industrial
circuit breakers to fuses and voltage regulators, made it
attractive to more companies, he said.

Europe Needing U.S.

“I’m just not sure if there’s a pure player that would
want lighting,” Levington said. “You would have to look to a
General Electric or Philips as the most strategic acquirers of
Acuity.”

Hubbell, which makes lighting products, as well as
electrical and power systems, would be attractive for a European
company looking for more revenue from the faster-growing U.S.
market, Ajay Kejriwal, an analyst at FBR & Co. in New York, said
in a phone interview.

“Having a local company that has the products and the
channel partners is a big advantage,” Kejriwal said.

After the takeovers of Cooper and Thomas & Betts, Hubbell
is now the only comparable diversified electrical-equipment
maker available for acquirers, according to Kejriwal. Hubbell’s
$4.7 billion market capitalization would make it a smaller
target than Cooper, said Wood at Macquarie. Profit is projected
to rise 26 percent to a record $338 million in 2013 from last
year, data compiled by Bloomberg show.

‘More Digestible’

“There are very few core electrical-equipment companies
remaining as potential targets,” Wood said in a phone
interview. “Hubbell is more digestible than Cooper. They
overlap with Cooper on a majority of product lines.”

Hubbell’s Class A shares control 73 percent of the voting
power, according to its annual report. Almost half of the Class
A shares are owned by the Harvey Hubbell and Louie E. Roche
trusts, which may prevent a takeover, said Nick Heymann, a New
York-based analyst with William Blair & Co.

“That has been the hurdle in why Hubbell hasn’t been
acquired so far,” Heymann said in a phone interview.

Still, Hubbell is an attractive enough asset for a buyer to
try to negotiate a deal with the controlling family trusts,
FBR’s Kejriwal said.

‘Push Up Valuations’

Eaton’s cash-and-stock offer for Cooper valued the company
at $72 a share when it was announced, a 29 percent premium to
the stock’s closing price on May 18.

Including net debt, the deal also valued Cooper at 14.2
times its earnings before interest, taxes, depreciation and
amortization in the last 12 months, more than 24 percent above
the median for takeovers greater than $1 billion in the
electrical-components, electronics and diversified-manufacturing
industries, data compiled by Bloomberg show. The acquisition of
Thomas & Betts, which closed last week, was 10.3 times Ebitda.

With fewer companies left as possible targets, Hubbell or
Acuity could command an even higher valuation than Cooper, said
Kejriwal.

“The valuation is a function of what the buyer wants to
pay and the availability of assets,” he said. “There aren’t as
many large, high-quality assets out there, so I think that will
push up valuations.”

‘Lots of Cash’

With a potential U.S. construction rebound and steady
profits in the electrical-products market from maintenance
spending, the largest companies in the industry may look to
expand through acquisitions, said Eli Lustgarten, an analyst
with Independence, Ohio-based Longbow Research.

Siemens has almost $12 billion in cash and short-term
investments, and Schneider has about $3.6 billion on that basis.
GE, which also runs a finance unit, holds $83.7 billion in cash,
excluding short-term investments.

Electrical equipment is “a highly profitable sector with
good long-term growth,” Lustgarten said. “Most major
manufacturing companies have pristine balance sheets, lots of
cash and are in a slow-growth environment. So, strategic
acquisitions make a lot of sense.”

Schneider held preliminary talks with Tyco International
Ltd. last year, Bloomberg reported in April 2011, citing people
with knowledge of the matter. Schneider also said that month
that speculation had included a possible deal with Cooper.

‘Building Buildings Again’

Jeffrey Immelt, GE’s chief executive officer, said at the
Electrical Products Group conference in Longboat Key, Florida,
yesterday that his company would look at acquisitions of $1
billion to $3 billion. Siemens is interested in “bolt-on”
acquisitions that can be worth “a couple of billion” dollars,
CEO Peter Loescher said at the same conference.

Electrical-product makers are becoming increasingly
attractive because of the need to retrofit lighting systems with
more energy-efficient designs, a focus on smart-grid upgrades
that will better manage power usage and a potential rebound in
new construction, JMP’s Severson said.

“We’re going to start building buildings again, so you
would be buying at the bottom of the cycle,” JMP’s Severson
said. “Looking at North America, you would be in front of
recovery in non-residential and residential construction, which
is going to benefit both electrical products and lighting.”